What Percent of Tithes and Offerings Should a Church Spend on Personal, Administrative, Overhead, Ministries, Etc.?

As with many areas of finances, the answer depends upon the specific circumstances and vision of the church. In every case, we recommend budgeting as a financial best practice that will improve financial accountability and stewardship. When creating a budget, we recommend surplus based budgeting which means that the plans should provide a surplus at the end of the fiscal period… In other words, spend less than you take in.

As to developing specific spending by category, one way to consider is to look at the lending guidelines for obtaining a loan. Our research indicates that lender guides for personnel cost should be in the range of 33% to 45% of total income. Personnel costs includes all salaries, wages and benefits of the staff. If the church has a loan, lending guidelines dictate no more than 33% of total income be allocated to debt service meaning payments of principal, interest and fees on the debt. Keeping overhead / administrative cost low is always prudent so we recommend a range of 5 to 20% of total income for administrative cost. Spending for worship services, ministries, care, benevolence and missions will need to be considered in the budget process after considering personnel and administrative overhead cost without creating a deficit financial position. The specific spending percentage for each of those categories can be in the range of 1% to 25% depending upon the vision, passion, and outreach for the church.

Another way to consider is to look at your ministry costs (Worship services, Pre-School, High School, Care, Benevolence, Missions, etc.) just like a company would look at their “Cost of Goods Sold”.  In other words, FIRST start with your expenses for those categories.  Then, look at all of your non-salary overhead costs (Things like your building, office supplies, meals, etc.).  Then, reserve 10% for cash flows.  Finally, whatever is left is what you can / should spend on personnel.

There are several ways to look at this and we’re happy to help think through this with you.

What is a good working capital or cash reserve target for a church?

Working capital is the amount of cash needed to cover current operating expenses, payroll, rent, and debt service without relying on income. Although Church income [offerings] come in each Sunday, the amounts are not predictable and can vary significantly depending upon the time of year, politics, or even the weather. In addition, conditions in the economy can also impact church income as employment conditions fluctuate. Furthermore, in our transient society, people change jobs and move much more frequently than in the past so member giving is subject to a high degree of change. So it is prudent to have a working capital reserve of funds on hand to manage finances through uncertain times. Each church will have different requirements based upon size and types of financial obligations and fixed commitments but our recommended working capital target is 3 months operating expenses set aside as a reserve fund. Operating expenses are things like payroll, rent (mortgage), utilities, office supplies, other loan payments, any other contractually agreed expenses, and ALL ministry expenses.  We view this as proactive and prudent financial management.

Should churches file forms 1023 and 990?

Every non-religious, non-profit organization must file Form 1023 with the IRS. It is the application to be a non-profit. Non-religious non-profits must also do an annual tax return, Form 990.

The church is not required by law to be a legal entity. It does not have to file Form 1023 or Form 990. Under IRS Section 501(c)(3) churches are automatically tax-exempt as long as they meet both the organizational and operational tests found in Section 501(c)(3).

(Keep in mind that churches must be “organized and operated exclusively for religious purposes” and this “purpose” must be stated in the church’s Articles of Incorporation.)

Despite the fact that churches are automatically tax-exempt, the only recognition from the IRS of non-profit standing comes from the Determination Letter (also known as the 501(c)(3) Exemption Ruling Letter or simply your tax letter). And this letter can only be obtained by filing Form 1023.

Many churches are filing Form 1023 because the Determination Letter is needed to receive various benefits including:

  • A non-profit, bulk-mailing discount from the post office.

  • Some tax exemptions from state governments.

  • The ability to set up 403(b) retirement plans.

By far the biggest benefit of filing Form 1023 is legal protection. It separates the pastor and elders from the entity of the church and requires the church to have a constitution, bylaws, minutes, etc.

Churches that have completed Form 1023 are NOT required to complete Form 990. We recommend that you do not submit Form 990. Form 990 becomes easily accessible public information, and we believe the financial operations of the church and officer salaries should remain private.

Form 1023 does request officer compensation amounts, and this information is made public. However, Form 1023 is not nearly as accessible as Form 990.

If you are ever challenged to file Form 990, then refer to IRC 6033(a)(3)(A)(i) and Reg. 1.6033-2(g)(1)(i), which expressly exempt churches from filing Form 990 and continue to apply even if the church files Form 1023.

Philosophy on Discretionary Spending

Establishing a discretionary budget for your staff can be very beneficial.

As a result of an effective discretionary policy, you can provide:

  • Clear understanding for each staff member or employee as to what they can spend as discretionary funds

  • Promotion of personal and spiritual development

  • Encouragement to the staff by letting them know the organization is committed to their growth and development

  • Flexibility as to how each staff member chooses to spend the funds

When developing a policy, clearly identify the types of costs that fall into discretionary spending and make sure the allotted amounts are consistent for each level of positions within your organization.  Incorporate these amounts into the budget and make sure actual costs are within budget throughout the year.

How Things Work at Dime

What is outsourced accounting?

Generally outsourced accounting includes the services below. (Dime provides some industry-specific services in addition to these general accounting services.)

  • Enter all bills into the accounting system and record them to the appropriate expense account. 

    • Regular monthly bills (telephone, copier lease, rent, etc.).

    • Credit Card company bills (including itemized transactions).

    • Personal expense reimbursements.

    • Capital expenditures and maintenance of depreciation schedules.

    • Payroll transactions. (Record payroll journal entries if not completed by Dime.)

  • Issue and distribute all checks.

  • Record deposits.

  • Reconcile all monthly bank statements including all deposits, checks, wire transfers, etc.

  • Process payroll transactions.

  • Provide a monthly “Executive Package” including month-end financial statements.

What is the workflow?

  • Accounting Access

    Dime is located in the Atlanta area, and the accounting system will be hosted out of this office. Many of our clients are located outside of Atlanta. We will provide you a login to our server, via Microsoft Terminal Services, so you can view all your reports and what not. This gives you the ability to access your financial data at your convenience from any internet connection.

  • Submitting Bills

    You may either scan your bills and email them to Dime or upload them to our PM system. We ask that you submit bills once a week on the day of your choice. When we receive the bills, we will send you a confirmation email stating that your bills have been received and will be processed shortly. It is very important that you ensure you receive a confirmation email from us. If you do not receive that email within 48 hours, then we have not received your invoices. Please contact your account manager immediately.

  • Filing

    It is your responsibility to maintain all files for audit purposes. We give you some of the files you need and the processes associated with them. Here are some examples. 

    • Bills to be paid

      We provide this file and the process associated with “What to do when a bill comes in.”

    • Vendor file system

      We recommend creating a file for each letter of the alphabet. Once the bills have been sent to us, please file each bill alphabetically by name.

    • Manual checks file

      This is for any manual checks that you write.

    • Deposits

      We provide this file for you. It will contain any deposits you make.

  • Cash Requirements Report

    If necessary this report will be emailed to you before each check run and is a heads up on 1) your current cash balance before the batch of bills are paid, 2) the amount of your pending bills, and 3) your cash balance after your pending bills batch is paid. This report is very useful in recognizing your cash position. It may be necessary to hold checks based upon cash balance, vendor management, etc. This is the time to confirm all vendors to be paid and perhaps delay payment of one or more bills. This is also the best time to confirm that all bills have been entered and are scheduled to be paid on time.

  • Manual Checks

    On occasion you will need to write a check yourself using hand-written check stock. This is typically done when a vendor needs “cash on delivery” or when you need something to be paid when purchased. Please make a copy of this check and fax or email this copy to us in a separate batch from your weekly bills. Make sure to file this copy in the “manual checks” file discussed above.

  • Deposits

    It is recommended that you make all deposits yourself. Please make a copy of the deposit slip and each check. Be sure to let us know what revenue account to book the deposit to. You can write the account number on the deposit ticket. Fax or email this report to us on a weekly basis separate from your bills.

  • Payroll Transactions

    If you don’t use Dime for payroll, please fax or email the payroll reports from your current payroll provider. It is highly recommended that you use Dime as your payroll processor. This alleviates any possible confusion in the month-end process.

  • Month End

    We will provide a copy of the general ledger showing each transaction (checks, deposits, and adjustments) for the month. You will need to review this report and alert us to any changes (using the “Journal Entry Form”) within 10 days of receiving the report. If we do not hear back within 10 days, we will assume all transactions are approved and will move forward with closing the books. Once the books are closed, we will provide you with your Balance Sheet and Income Statement. If there are other reports you would like included in the monthly “Executive Package,” we will do our best to meet your needs.

What happens with previously recorded transactions?

9 times out of 10, we have a way of converting all your history data over into our accounting system. In fact, we have someone dedicated to just this! The other 1 time out of 10, we convert over summary data. Regardless, we have to have good data to start from, so it’s in everyone’s best interest for us to have the best implementation plan we can.

Dime has a partnership with ADP for payroll processing. If you are currently using a different payroll provider, we will handle the conversion to ADP.

What forms will I use?

We provide many standard and customized forms for you to use when communicating with Dime. These are included in our PM system. If there is a form you need that we did not provide, please ask, and we’ll put one together for you. We want to do our best to over-communicate with you and give you all the tools that you need to operate.

  • Expense Reimbursement Form

    This is for expenses that the employee paid for out of pocket. Employees will submit their expense reimbursement form for approval to their supervisor on a monthly, weekly, or bi‐weekly basis. This form must be approved by a supervisor, then faxed or emailed to Dime. It is important that you collect receipts for all expenses and that you file these receipts and expense reports in the vendor file system. It is not important that Dime receives copies of the receipts. Just the expense reimbursement form is sufficient.

  • Check Request Form

    This is for payments that need to be made when no bill is available. This might be for 1099 contractors, volunteer reimbursements, payments for conferences or other events, etc. It is important that appropriate approval processes are implemented and that the check request form is included in the weekly email or fax of bills.

  • Cover Sheet

    Every time you send us something by fax or email, it’s best to use this form.

  • Other Forms

    Dime will provide other customized forms such as payroll change forms, direct deposit authorization forms, housing allowance calculator, weekly checklist of tasks, etc.

How much debt can my church afford?

Churches generally use debt to fund capital projects or building expansions that enable them to grow and expand ministries. Assuming that your church has a surplus operating budget [spending less than taking in each month] and have a good financial history, our recommended guideline is to borrow no more than 3 times your annual general fund income and to not exceed a debt service ratio to income of 30%. In addition, we would want to see a healthy working capital reserve fund (3 months operating expenses) set aside and a substantial cash down payment on the project, in the range of 25 to 30%.   Of course, the financial lender will have final say in how much money can be borrowed for a project looking into things such as current budgets, past financial statements and loan to value on the project.

Church Profitability Targets

The appropriate governing body within the church (whether it be the finance committee, the elder board, or another board or committee) should determine what is appropriate for the church.  As a general guideline having a 10% surplus is the minimum.  In fact, we often refer to 10% as being “break-even” and suggest shooting for 15% profitability.  Establishing these targets is critical when developing budgets as it provides a cushion when expenses exceed the budget or when revenue falls short of the budget.

Can we Pay the Expenses For A Guest Speaker/Musician and These Not be Reported as Taxable Income?

In order for expense payments to not be considered taxable income, the expenses must be substantiated by the guest speaker/musician.  An expense report, with receipts, should be submitted for payment.  Alternatively, the hotel, airline, etc. could be paid directly by the church.  However, as long as the expenses are itemized, the reimbursement can be made to the guest speaker/musician and will not be taxable.  The honorarium, however, will be taxable.

Sometimes travel “allowances” are given, and in these cases, an itemization of expenses is not provided. A travel “allowance” would then be considered taxable income as well as the honorarium itself.

Budgeting for New Churches

When a church is getting started, there are a lot of expenses and very little, if any, income, creating a massive gap between income and expenses.

As the church gets established, expenses come down (there’s not as much capital being purchased), and people start attending and giving, so income increases. The gap comes closer together.

A budget does three things that will help bring the gap closer together:

1.     Decreases or stabilizes expenses.

2.     Sets priority-percentage giving goals.

3.     Sets fundraising goals.

Start with Vision.

Have a big vision! Who you want to be as a church?

Develop Steps Toward Your Vision.

Work backwards from your big vision and list tangible, easy steps you must take to accomplish your vision. Plan all the things you want to “launch” along the way (small groups, Sunday services, children’s ministry, youth ministry, etc.).

For each step toward your vision, assess what the step will physically and financially require. For instance, if you want to start small groups, you may need an administrator, leaders, hosts, teachers, curriculum, etc.

Decide which steps will be the most effective and the most financially sustainable early on. For instance, you may want to start a Sunday service, but you see that it could cost up to $1 million. You may not be able to do that right away.

Next, determine what level your income needs to reach to make each step possible. This helps you set goals for priority-percentage giving. If there is a gap between the cost of the step and the income goal, then rearrange the steps, or set a fundraising goal for that step.

Set goals for the dates when you would like to reach each step.

Assign the Work.

Assign names to those who will physically do the work of each step, and get started!

Raise Funds.

Every new church must do some fundraising. Your budget is a clear picture of your gap between expenses and income goals, and a clear picture of the building blocks to accomplishing your vision. This makes it easy to present your plan and ask people for money.

It’s easy to get people to buy into your church when you can show them that you are starting small, but you have a plan for growth.

Enlist Help.

This budgeting plan empowers your church to do what is logical, functional, and effective. Dime can lead your church through this process. But what we do best is to come in behind this process and partner with you to implement and execute your plan. The accountability and support we provide will give you financial peace of mind and will allow your donors to give with confidence.

Appropriate amount of financial information to share with the congregation

The amount of information shared with the congregation is different for every church.  We believe the WAY this information is presented is most important.  Our opinion is that, at minimum, a summary annual accounting of the church financial position should be shared with the congregation once a year. The summary annual accounting should include the following components:

  • operating income status as either a surplus or a deficit dollar amount and percentage of total income received;

  • percentage of spending for each majority categories including personnel, administrative, ministries, and mission and benevolence spending;

  • status of spending on capital projects including amounts raised and expended and percentage of completion or the project;

Additionally, providing a copy of annual financial statements upon written request is a good practice. At no time should a disclosure of giving records be made.

A high degree of transparency in finances is a good thing and will empower trust and confidence across the organization. A few suggestions to go beyond the minimums would include quarterly financial summary discussions and clear understanding of who is managing the finances – an elder board or a finance committee and what their accountability is to the leadership of the church.

Again, the way this information is presented is most important.  We’ve found that using a narrative format [whether written or from the stage] is most effective in presenting the true financial picture.  Simply presenting numbers doesn’t always speak the right language.  As always, we’re happy to help think through this with you.